Are Cardholders Being Taught to Engage in Friendly Fraud?

When consumers dispute purchases on their payment cards that they or another member of their household actually made, they’re engaging in “friendly fraud.”

Much of today’s friendly fraud is benign — meaning cardholders dispute purchases that show up on their card statements because they don’t recognize them. How the merchant’s name is listed on the statement may be confusing, or another household member could have made the purchase, unbeknown to the cardholder. Other cases are not so innocent: Unfortunately, incidents of hostile friendly fraud— where cardholders use various means to actively ‘game’ the system for their own benefit— are on the rise.

We surveyed more than 200 merchants in 2016 and 2018 to gauge their experiences with friendly fraud. Most reported a considerable increase. Digital goods merchants – who in 2016 reported that 48% of overall fraud was ‘friendly’ – stated this had increased to 60%. Airline and travel merchants experienced an increase of 6% to 39%. (Source: Ethoca)

Have our current card industry rules and practices caused a big increase in such disputes?

Here’s a common scenario:

Let’s say a cardholder disputes a $20 charge that her spouse made without informing her. The issuer will first issue a provisional credit back to her account, as required by regulation. Beyond that, the issuer has a tough economic choice to make. It could:

Investigate the details around the disputed charge— spending money and time to do so— and, if the charge is determined to be legitimate, add the disputed amount back to the cardholder’s account.

Write off the disputed charge as a loss without an investigation. This could be cheaper because of the low value of the disputed purchase compared to the cost of an investigation. Moreover, it can avoid jeopardizing the relationship with an otherwise responsible and loyal cardholder.

The economic choice for the issuer is a tough one because either way it loses money due to the dispute. So it must decide whether the cost of the investigation is worth it— both in dollars and customer loyalty.

The ease to which cardholders can dispute charges today has led to a moral hazard. Cardholders may be tempted to file a dispute any time they don’t recognize a charge on their statement. Or they may dispute charges because they don’t feel they were justified. For example, someone may dispute an extra fee that an airline charged because they don’t feel the charge was warranted even though they agreed to it at the airline’s check-in counter. Issuers have been challenged with trying to balance the consumer protection regulations they must adhere to along with the murky realities of customers’ credit card use.

In an ideal world, merchants and issuers would save millions of dollars in chargeback and dispute investigation costs if consumers took the time to fully ensure the charges they were disputing were in fact fraudulent— rather than simply clicking the dispute button any time they don’t recognize a charge.

The Evolution of Cardholder Behavior

This inadvertent training of consumers to dispute transactions instead of taking accountability for them has been an evolution.

Here’s the common continuum of a cardholder’s friendly fraud journey:

1. Awareness: Cardholder spots an unknown charge and experiences how easy it is to dispute transactions. Perhaps they’ve had to deal with legitimate fraud and seen how quickly issuers were able to dispute and resolve those fraudulent charges.

2. Benign “Do Not Recognize”: Cardholder has a true experience of not recognizing a charge initially on their card and disputes it. The issuer and merchant may just give them the credit without investigation because the cost of a chargeback is more than simply issuing the refund.

3. Path-of-Least-Resistance Moment: Cardholder realizes it is hassle-free and fast to contact the issuer rather than the merchant to get a credit for a disputed purchase.

4. Fuzzy Morality Drives Abuse: Cardholder may rationalize disputing charges they don’t instantly recognize or want to pay for. They may not acknowledge their action is true fraud. This starts a more regular pattern of purchase and dispute because the cardholder often wins without being penalized.

Real-Time Solutions That Reduce Disputes

Unless the current way issuers and merchants handle card disputes changes, we’re continuing to train cardholders to dispute charges— driving up the costs associated with friendly fraud, as well as increasing false declines of legitimate transactions.

One solution to reduce or eliminate friendly fraud is to provide cardholders and issuers with detailed transaction information. This would reduce confusion and make it clear to the cardholder that the issuer and merchant have proof that they in fact made the purchase with their card. For example, if the card statement includes a digital receipt that shows the exact time and place of a transaction— including the IP address and geographic location of the computer used for any ecommerce charge— cardholders would be able to more quickly and easily recognize purchases they made.

In light of today’s regulatory environment, using data to provide more real-time solutions that present helpful information about legitimate purchases can reduce the need for cardholders to dispute transactions and significantly cut down on the rate of friendly fraud— protecting merchants and issuers from lost revenue and the expenses associated with chargebacks.

About the Author

As the SVP for Issuer Relations, Steve is responsible for expanding Ethoca’s financial institution customer base while cultivating our collaboration network by optimizing issuer clients contributions. Over a 20 year career in operations, technology and shared services at JP Morgan Chase & Co., Steve was a champion of innovation to maximize fraud prevention, dispute recoveries and cost reduction. He led groups for Fraud, Disputes and Collections that covered internal case management system design, large technology deployments, workforce management & capacity planning, self-service including SMS & email outreach, data infrastructure and off-shoring & near-shoring efforts. His experience in assessing and implementing a wide range of loss mitigation, cost efficiencies and process solutions is a key objective for his role in helping Ethoca clients.